Part 4: Financial statements

Independant Audit Report - page 3

Australian Office of Financial Management

Statement by the Chief Executive Officer and Chief Finance Officer

In our opinion, the attached financial statements for the year ended 30 June 2006 are based on properly maintained records and give a true and fair view of the matters required by the Finance Minister’s Orders made under the Financial Management and Accountability Act 1997, as amended.

SIGNED	SIGNED
N Hyden Chief Executive Officer 14 August 2006	P Raccosta Chief Finance Officer 14 August 2006

Income statement
for the year ended 30 June 2006

for the year ended 30 June 2006

The above statement should be read in conjunction with the accompanying notes.

Balance sheet
as at 30 June 2006

Balance sheet as at 30 June 2006

The above statement should be read in conjunction with the accompanying notes.

(1) Refer to the Statement of Changes in Equity.

Cash flow statement
for the year ended 30 June 2006

Cash flow statement for the year ended 30 June 2006

The above statement should be read in conjunction with the accompanying notes.

Statement of changes in equity
for the year ended 30 June 2006

Statement of changes in equity for the year ended 30 June 2006

Schedule of commitments
as at 30 June 2006

Schedule of commitments as at 30 June 2006

The above schedule should be read in conjunction with the accompanying notes.

Note: Commitments are GST inclusive where an input tax credit is not available to the AOFM.

Operating leases included are effectively non-cancellable and comprise:

Nature of lease

General description of leasing arrangement

Lease for office accommodation

Motor vehicle leases

the lease term is for 15 years less one day with no option to renew; and
lease payments are subject to review on each second anniversary of the lease commencement date (22 December 2000).
the novation of lease rental payments over motor vehicles.

Other commitments relate to contractual obligations for the provision of internal audit services, payroll services, wire services, fiscal agency agreements and service agreements with other Commonwealth bodies.

Schedule of administered items

Schedule of administered items (continued)

The above schedule should be read in conjunction with the accompanying notes.

Legal agreements between the Australian Government and interest rate swap counterparties provide for transactions to be settled on a net basis. Amounts above are reported on a net basis. Aggregate amounts are disclosed at Note 26C.
From 1 July 2005 capital proceeds received on issuance of debt are classified against ‘proceeds from borrowing’ and interest proceeds received are classified as an offset against ‘interest paid’. Prior to 1 July 2005 all proceeds received on issuance of debt were classified against ‘proceeds from borrowing’.
Includes redemption of debt issued on behalf of the States.

Schedule of administered items (continued)

The above schedule should be read in conjunction with the accompanying notes.

Note: Commitments are GST inclusive where an input tax credit is not available to the AOFM.

As at 30 June 2006 there were no open transactions under the AOFM’s securities lending facility. The repurchase price of Treasury Bonds sold by the Australian Government to other parties under the facility as at 30 June 2005 was $38,827,717. The sale price of Commonwealth Government Securities acquired by the Australian Government from other parties under the facility as at 30 June 2005 was $38,830,286. These transactions are not recorded on the AOFM’s schedule of assets and liabilities administered on behalf of government.

Statement of activities administered on behalf of government

The administered activities of the AOFM are directed towards managing the Australian Government’s net debt portfolio at least cost over the medium term, subject to the government’s policies and risk preferences. It also aims to contribute to financial market efficiency by maintaining sufficient Commonwealth Government Securities on issue to support the Treasury Bond futures market.

The major financial activities of the AOFM include the issuance of various borrowing instruments, the strategic formulation and undertaking of portfolio management, including through swap transactions, administration of the debt portfolio, and monitoring the conditions in Treasury Bond and futures markets.

Details of the AOFM’s planned activities for 2005-06 can be found in the Treasury Portfolio Budget and Portfolio Additional Estimates Statements for 2005-06, which have been tabled in Parliament.

Notes to and forming part of the financial statements
for the year ended 30 June 2006

Note	Description
1	Objectives of the AOFM
2	Summary of significant accounting policies
3	The impact of transition to Australian Equivalents to IFRS (AEIFRS) from previous Australian GAAP
4	Operating revenues
5	Operating expenses
6	Financial assets
7	Non-financial assets
8	Payables
9	Provisions
10	Cash flow reconciliation
11	Contingent liabilities and assets
12	Executive remuneration
13	Remuneration of auditors
14	Average staffing level
15	Specific payment disclosures
16	Departmental financial instruments
17	Revenue before re-measurements administered on behalf of government
18	Expenses before re-measurements administered on behalf of government
19	Administered re-measurements
20	Assets administered on behalf of government
21	Liabilities administered on behalf of government
22	Administered reconciliation table
23	Administered contingent liabilities and assets
24	Administered financial instruments
25	Securities lending facility
26	Disclosures of appropriations
27	Reporting of outcomes
28	Major departmental revenues and expenses by output group and output
29	Communications Fund
30	Events occurring after reporting date

Note 1: Objectives of the AOFM

The Australian Office of Financial Management (AOFM), a ‘prescribed agency’ under the Financial Management and Accountability Act 1997, is responsible for the Australian Government’s debt management activities.

The AOFM delivers a single output — debt management. Debt management encompasses the execution of instruments including Treasury Bonds, Treasury Indexed Bonds, Treasury Notes and associated derivatives. It also encompasses risk management activities, compliance activities, financial reporting, debt administration and monitoring of conditions in Treasury Bond and futures markets.

The AOFM aims to manage the Australian Government’s net debt portfolio at least cost over the medium term, subject to the government’s policies and risk preferences. It also aims to contribute to financial market efficiency by maintaining sufficient Commonwealth Government Securities on issue to support the Treasury Bond futures market.

The AOFM issues long term fixed interest debt for the purposes of meeting government financing requirements and for maintaining the efficiency of the Treasury Bond and Treasury Bond futures markets. The AOFM issues bonds with tenors chosen to support the 3-year and 10-year bond futures baskets. The current strategy is to issue approximately $5 billion in each bond line over a two year period.

The AOFM manages the cost and risk inherent in the debt on issue by executing domestic interest rate swaps to adjust the blend of fixed rate and variable rate debt in the portfolio and reduce its average term to maturity. By this means it aims to achieve lower public debt servicing costs, while at the same time keeping the variability of cost to an acceptable level. It is guided in this task by reference to a benchmark portfolio.

Approximately 15 per cent of the long term debt portfolio is indexed debt. The AOFM does not actively manage (through derivative transactions) the interest rate risk inherent in this debt, although it is taken into account in setting the portfolio benchmark.

The AOFM also manages the overall level of cash in the Official Public Account with the Reserve Bank of Australia (RBA). It does this through making short term deposits with the RBA to offset fluctuations in the daily flows in and out of the government’s accounts. It may also make short term borrowings from the public by issuing Treasury notes, although this has not been necessary in the last two years.

Debt management activities comply with applicable accounting standards and legislative requirements. The key legislative mechanisms that establish the Australian Government’s debt management capacity are as follows:

the Loans Redemption and Conversion Act 1921 gives the Treasurer the power to borrow money necessary for the purpose of paying off, repurchasing or redeeming any loan in accordance with the Act;
the Commonwealth Inscribed Stock Act 1911 and associated regulations represent the Australian Government’s primary vehicle for the creation and issuance of domestic stock prescribed under the Act, including Treasury Bonds and Treasury notes;
the Loans Securities Act 1919 provides the Australian Government with additional borrowing flexibility by allowing overseas borrowings and borrowings in foreign currencies and by providing an explicit authority to enter into swaps and other financial agreements;
the Financial Agreement Act 1994 formalises revised debt redemption arrangements applying since 1 July 1990 between the Australian Government and the States and Territories; and
section 39(2) of the Financial Management and Accountability Act 1997 gives the Treasurer the power to invest public money in any authorised investment for the purposes of managing the public debt of the Australian Government.

For 2005-06, the AOFM incurred interest on Commonwealth Government Securities (net of State debt) of $3,627 million ($3,912 million for 2004-05) or 6.57 per cent (6.93 per cent for 2004-05). After offsetting a return on swaps of $136 million ($181 million for 2004-05), the gross Commonwealth Government Securities portfolio incurred a cost of $3,491 million or 6.32 per cent ($3,731 million or 6.61 per cent for 2004-05). The return obtained on term deposits with the Reserve Bank of Australia was $1,313 million or 5.55 per cent ($805 million or 5.40 per cent for 2004-05).

Note 2: Summary of significant accounting policies

1.1 Basis of accounting

The financial statements are required by section 49 of the Financial Management and Accountability Act 1997, and are a general purpose financial report prepared on a going concern basis. These financial statements are the first AOFM financial statements to be prepared in accordance with Australian Equivalents to International Financial Reporting Standards (AEIFRS). AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards allows certain exemptions in relation to the presentation of comparative information in accordance with AEIFRS (see Note 2.2).

The financial statements have been prepared in accordance with:

Finance Minister’s Orders (FMOs) (being the Financial Management and Accountability Orders (Financial Statements for reporting periods ended on or after 1 July 2005));
Australian Accounting Standards and Accounting Interpretations issued by the Australian Accounting Standards Board that apply for the reporting period; and
Interpretations issued by the Urgent Issues Group (UIG) that apply for the reporting period.

These financial statements have been prepared under the historic cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through the profit or loss, certain classes of property, plant and equipment and employee entitlements.

Liabilities and assets which are unrecognised in the Balance Sheet are reported in the Schedule of Contingencies (where applicable) or where remote or unquantifiable, as contingencies reported at Notes 11 (departmental) and 23 (administered).

The continued existence of the AOFM in its present form, and with its present program, is dependent on government policy and on continuing appropriations by Parliament for the AOFM’s administration and program.

Administered revenues, expenses, assets, liabilities and cash flows reported in Schedule of Administered Items and related Notes are accounted for on the same basis and using the same policies as for departmental items, except where otherwise stated at Notes 2.13 to 2.16.

1.2 Application of AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards

The AOFM’s financial statements until 30 June 2005 had been prepared in accordance with previous Australian Generally Accepted Accounting Principles (Australian GAAP). Previous Australian GAAP differs in certain respects from AEIFRS. When preparing the AOFM’s 2005-06 financial statements, certain accounting, valuation and presentation methods applied in the previous Australian GAAP financial statements were amended to comply with AEIFRS.

With the exception of financial instruments, comparative figures (2004-05) were restated to reflect these adjustments. The FMOs require the AOFM to use the exemption available under paragraph 36A of AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards to apply AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement only from 1 July 2005. Comparative information presented for financial instruments within the scope of AASB 132 and AASB 139 is measured and classified using the requirements of previous Australian GAAP.

Under previous Australian GAAP, the AOFM measured all financial assets and financial liabilities on an amortised cost basis in accordance with the historic cost convention. Under AEIFRS the AOFM now measures at fair value through the profit or loss all financial assets and financial liabilities, which are reliably measurable at fair value. Financial assets and financial liabilities that are not reliably measurable at fair value are measured at transaction price (the fair value of consideration given or received at the time the transaction is entered into).

Fair value of a financial instrument refers to an estimated exchange equivalent price using relevant inputs from reference markets and using valuation techniques. Fair value is synonymous with market value and is determined on the presumption that the entity is a going concern and is operating in an active market under normal market conditions, without any intention or need to liquidate, curtail materially the size of its activities or undertake transactions on adverse terms. Fair value is determined without discounting for asset or liability positions that are larger than standard marketable parcels.

The fair value methodology requires relevant financial assets and financial liabilities to be measured at current interest rates (as opposed to issuance interest rates for fixed interest instruments and relevant reference interest rates for floating rate instruments used under an amortised cost approach). Interest rates, and therefore the fair value of a financial instrument, may change repeatedly during the life cycle of a transaction due to market forces.

AASB 1008 Accounting Policies, Changes in Accounting Estimates and Errors requires that where a new Australian Accounting Standard has been issued but is not yet effective, reporting entities must disclose the nature of the changes and the application date. From an initial assessment of amendments made to date, there is no expected impact on AOFM’s future annual financial statements as a result of the adoption of these standards, except for AASB 2005-4 Amendments to Australian Accounting Standards [AASB 139, AASB 132, AASB 1, AASB 1023 and AASB 1038], issued in June 2005 and applicable to reporting periods commencing on or after 1 January 2006 (1 July 2006 for the AOFM). The impact of this amendment is discussed at Note 2.16. The AOFM intends to adopt all relevant amendments on their application dates.

1.3 Departmental and administered items

Departmental assets, liabilities, revenues and expenses are those items that are controlled by the AOFM including:

computers, plant and equipment used in providing goods and services;
liabilities for employee entitlements;
revenues from user charging, sale of property assets, etc, where the proceeds are deemed appropriated under section 31 of the Financial Management and Accountability Act 1997; and
employee expenses and other administrative expenses incurred in delivering outputs to government.

Administered assets, liabilities, revenues and expenses are those items which are controlled by the government and managed or overseen by the AOFM on behalf of the government. These items include the repayment and repurchase of debt, swap transactions, grant payments to other governments and interest payments on debt.

The purpose for the separation of administered and departmental items is to enable assessment of the administrative efficiency of the AOFM in providing goods and services to the government.

Administered items are identified separately in the financial statements by shading.

1.4 Revenue (Departmental)

The revenues described in this Note are revenues relating to the departmental activities of the AOFM.

(a) Revenue from government — appropriations

The full amount of the appropriation for departmental outputs for the year (less any savings offered up at Additional Estimates) is recognised as revenue.

(b) Services and resources received free of charge

Services and resources received free of charge are recognised as revenue when, and only when, a fair value can be reliably determined and the services would have been purchased if they had not been donated. Use of those resources is recognised as an expense.

Contributions of assets at no cost of acquisition are recognised as revenue at their fair value when the asset qualifies for recognition.

Revenue from the rendering of a service is recognised by reference to the stage of completion of contracts or other agreements to provide services.

Revenue from disposal of non-current assets is recognised when control of the asset has passed to the buyer.

1.5 Transactions with the government as owner (Departmental)

(a) Equity injections

Appropriations designated as ‘equity injections’ (less any savings offered up at Additional Estimates) are recognised directly in Contributed Equity in the Balance Sheet in the financial year that the appropriation takes effect.

(b) Distributions to owners

Distributions to owners are debited to Contributed Equity in the Balance Sheet unless the distributions are in the nature of a dividend. Dividends are debited to Accumulated Results in the Balance Sheet.

The AOFM did not make a distribution to owners during 2005-06 (nil for 2004-05).

1.6 Employee entitlements (Departmental)

Liabilities for services rendered by employees are recognised at the end of the financial year to the extent that they have not been settled.

(a) Leave

The liability for employee entitlements includes provisions for annual leave and long service leave. No provision has been made for sick leave as all sick leave is non-vesting and the average sick leave taken in future years by employees of the AOFM is estimated to be less than the annual entitlement for sick leave.

The leave liabilities are calculated on the basis of employees’ remuneration at the end of the financial year, adjusted for expected increases in remuneration effective from 1 July 2006.

Liabilities for short-term employee benefits (that is, wages and salaries, annual leave, etc, expected to be settled within 12 months from the reporting date) are measured at their nominal amounts.

All other employee benefits are measured at the present value of the estimated future cash flows to be made in respect of all employees at the end of the financial year. In determining the present value of the liability, the AOFM has commissioned an actuarial assessment by the Australian Government Actuary of the anticipated attrition rates and pay increases through promotion and inflation. The Australian Government Actuary has recommended the application of the shorthand method, as prescribed by Section 4C of the FMOs, for determining the present value of the long serve leave liability.

(b) Separation and redundancy

Provision is made for separation and redundancy payments in circumstances where the AOFM has formally identified positions as excess to requirements and a reliable estimate of the amount of the payments can be determined.

Staff of the AOFM contribute to the Commonwealth Superannuation Scheme, Public Sector Superannuation Scheme (Defined Benefit), Public Sector Superannuation Scheme (Accumulation Plan) and other employee nominated schemes. Employer contributions (including productivity contributions) of $885,232 have been made to these schemes during the financial year (2004-05: $617,143).

The AOFM makes employer contributions to the Australian Government at rates determined by an actuary to be sufficient to meet the cost to the government of the superannuation entitlements of its employees. The liability for superannuation benefits payable to an employee upon termination is recognised in the financial statements of the Australian Government.

An on-cost liability, based on actuarial assessment, has been recognised in the Balance Sheet for employer superannuation contributions payable on accrued annual and long service leave as at the end of the financial year. In addition, a liability has been recognised at the end of the financial year for outstanding superannuation contributions payable in relation to the final fortnight of the financial year.

1.7 Leases (Departmental)

A distinction is made between finance leases and operating leases. Finance leases effectively transfer from the lessor to the lessee substantially all risks and benefits incidental to ownership of leased non-current assets. Under operating leases the lessor effectively retains substantially all such risks and benefits.

The AOFM holds operating leases only. Operating lease payments are charged to the Income Statement on a basis which is representative of the pattern of benefits derived from the leased assets.

1.8 Cash and investments (Departmental)

Cash means notes and coins held and any deposits held at call with a bank. Deposits held with a bank that are not at call are classified as investments.

1.9 Financial instruments (Departmental)

Accounting policies for financial instruments are stated at Note 16.

1.10 Infrastructure, plant and equipment (Departmental)

(a) Asset recognition threshold on acquisition

Purchases of infrastructure, plant and equipment are recognised initially at cost in the Balance Sheet, except for purchases costing less than $500, which are expensed at the time of acquisition. The asset recognition threshold is applied to each functional asset. That is, items or components that form an integral part of an asset are grouped as a single asset.

(b) Revaluations

Basis

Following initial recognition at cost, valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets do not materially differ with the assets’ fair values as at the reporting date, in accordance with Australian Accounting Standard AASB 116 Property, Plant and Equipment.

Fair value has been determined as depreciated replacement cost for leasehold improvements and market selling price in an active market for computers, plant and equipment.

Revaluation adjustments are made on a class basis. Revaluation increments are credited to Equity under the heading of Asset Revaluation Reserve except to the extent that they reverse a previous revaluation decrement of the same asset class. Revaluation decrements for a class of assets are recognised directly through the Income Statement except to the extent that they reverse a previous revaluation increment for that class. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to Accumulated Results.

For all assets excluding leasehold improvements, any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset. For leasehold improvements, accumulated depreciation on revaluation is restated proportionately in accordance with the gross carrying amount of the asset.

Frequency

Infrastructure, plant and equipment is formally revalued every three years. All infrastructure, plant and equipment assets were revalued as at 1 April 2006.

Assets acquired after the commencement of a revaluation are not captured by the revaluation then in progress.

Conduct

All valuations are conducted by an independent qualified valuer.

The AOFM’s computers, plant and equipment assets are carried at values which approximate market selling price. Consequently, the value of these assets has not been subjected to an impairment assessment. For those assets measured at depreciated replacement cost, an impairment assessment was made as at the end of the financial year. An impairment provision was not required.

(d) Depreciation and amortisation

The depreciable value of infrastructure, plant and equipment assets is written off over the estimated useful lives of the assets to the AOFM using the straight line method of depreciation. Leasehold improvements are amortised on a straight line basis over the lesser of the estimated useful life of the improvements or the unexpired period of the lease.

Depreciation and amortisation rates (useful lives) and methods are reviewed at each balance date and necessary adjustments are recognised in the current, or current and future reporting periods, as appropriate.

The depreciable value of infrastructure, plant and equipment assets is based on a zero residual value.

Depreciation and amortisation expenses have been determined by applying rates to new depreciable assets based on the following useful lives:

Class of depreciable asset	2006	2005
Leasehold improvements	lease term	lease term
Computers	3-5 years	3-5 years
Office equipment	5 years	5 years
Furniture	10 years	10 years

The aggregate amount of depreciation and amortisation allocated for each class of asset during the reporting period is disclosed at Note 5C.

1.11 Computer software (Departmental)

Purchases of computer software are recognised at cost in the Balance Sheet except for purchases costing less than $10,000, which are expensed at the time of acquisition.

An item of software represents:

a software licence granted for greater than 12 months; or
a developed software application.

Developed software is recognised by capitalising all directly attributable internal and external costs that enhance the software’s functionality and therefore service potential.

Software assets are amortised on a straight line basis over their anticipated useful lives, being three to five years (2004-05: three to five years). Software assets are not subject to revaluation and consequently are carried at cost less accumulated amortisation in the financial statements.

An impairment assessment was made as at the end of the financial year and an impairment provision was not required.

1.12 Taxation

The AOFM is exempt from all forms of taxation except for Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST).

Revenues, expenses, assets and liabilities are recognised net of GST, except:

where the amount of GST incurred is not recoverable from the Australian Taxation Office; and
for receivables and payables (where GST is applicable).

Receipts and payments in the Statement of Cash Flows are recorded in gross terms (that is, at their GST inclusive amounts).

All supplies provided by the AOFM are input taxed under the GST legislation with exception to remuneration benefits provided to staff. In addition, in accordance with applicable GST regulations the AOFM is entitled to a reduced input tax credit (equal to 75 per cent of the GST paid) on some purchases such as security transaction services.

1.13 Reporting of administered activities

Administered revenues, expenses, assets, liabilities and cash flows are presented in the Schedule of Administered Items and related Notes. Except where otherwise stated, administered items are prepared on the same basis of accounting and using the same policies as for departmental items, including the application of Australian Accounting Standards, Accounting Interpretations and Consensus Views of the UIG.

Administered appropriations from the Official Public Account (such as appropriations for the repayment of borrowings) or transfers by the AOFM of administered receipts to the Official Public Account (such as proceeds from the issuance of securities) are not reported in the administered financial statements. This accounting treatment seeks to report the government’s transactions with parties outside the General Government Sector and acknowledges that these transactions are internal to the Administered entity. An exception to the above policy relates to the disclosure of administered cash flows, given that cash transferred between the OPA and AOFM’s administered bank accounts is necessary for the completeness of the cash flow disclosures.

1.14 Exemption from FMOs — administered schedule of revenues and expenses

Section 6A.1 of the FMOs provides an exemption to the AOFM from presenting the Schedule of Revenues and Expenses Administered on Behalf of Government, and associated Notes, from the requirements set out in Appendix A, Section 3 of the FMOs. Instead the AOFM is to comply with the requirements of AASB 101 Presentation of Financial Statements for presenting its administered revenues and expenses.

Paragraph Aus 83.1 of AASB 101 allows reporting entities to adopt an income statement presentation that is most relevant to users in understanding the entity’s financial performance.

With the adoption of fair value through the profit or loss measurement for financial assets and financial liabilities under AEIFRS, the AOFM has presented its administered revenues and expenses into two categories:

Operating result before re-measurements; and
Re-measurements.

The category ‘Operating result before re-measurements’ records a financial result that is consistent with historic cost accounting principles and is most relevant to the AOFM’s role in managing its debt portfolio whereby debt and financial instruments are predominately issued and held to maturity.

The category ‘Re-measurements’ provides information on the unrealised changes in the market valuation of the portfolio of financial assets and financial liabilities during the financial year. This is relevant for assessing changes in financial risk exposures and the value of transactions managed from year to year. In an issue and hold to maturity strategy the revaluation effect will net to zero over the life of a financial instrument.

1.15 Summary of significant administered accounting policies

(a) Revenue

All administered revenues are revenues relating to the activities performed by the AOFM on behalf of government.

Interest revenue is earned on loans to State and Territory governments, term deposit investments and swaps. Interest is credited to revenue as it accrues. Interest revenue on swaps is disclosed on a gross basis in the Schedule of Revenues and Expenses Administered on Behalf of Government.

(b) Grants

Under the Financial Agreement Act 1994, the government compensates the State and Territory governments:

for additional interest costs of replacing maturing Australian Government debt with borrowings in their own names, or through their authorities, rather than by the Australian Government borrowing on their behalf; and
for reduction in contributions from the Australian Government resulting from the new arrangements.

In addition to the above compensation, the Australian Government assists the State and Territory governments to redeem maturing debt on allocation to them.

Payments made to the State and Territory governments under these arrangements are recognised as expenses as and when they fall due and payable. Grant expenses are measured at cost.

All borrowing costs are expensed as incurred except to the extent that they are directly attributable to qualifying assets, in which case they are capitalised. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

The AOFM’s borrowing program does not specifically raise funds for qualifying assets.

(d) State and Territory loans

Until July 1990, the Australian Government borrowed on behalf of the State and Territory governments and allocated a portion of the proceeds of its Treasury Bond raisings to those governments to fund the redemption of previous allocations of bond raisings. Until 1986, the Australian Government also borrowed on behalf of the State and Territory governments to raise new borrowings. In addition to Treasury Bond allocations, there are outstanding balances on stock issued by the States prior to 1 January 1924 and taken over by the Australian Government in 1927 (under the original Financial Agreement Act). The States and Territories are responsible for meeting all obligations as to interest and principal on the debt on allocation to them.

Debt on allocation to the State and Territory governments, and other advances made under Commonwealth-State financing arrangements not evidenced by the issue of securities (housing advances), are recognised as loans to State and Territory governments.

From 1 July 2004 to 30 June 2005

Under previous Australian GAAP, loans to State and Territory governments were measured on an amortised cost basis in accordance with the historic cost convention and reduced to the extent to which they were impaired or uncollectable.

Adjustments on transition date: 1 July 2005

At the date of transition Treasury Bonds on allocation to the State and Territory governments (principal value $125.9 million, fair value $129.5 million) and housing advances to the State and Territory governments (principal value $3,512.8 million, fair value $3,239.5 million) are measured on a fair value basis. On 1 July 2005 changes in carrying amounts for State and Territory government loans were taken to opening equity.

From 1 July 2005

Treasury Bonds on allocation to the State and Territory governments and housing advances to the State and Territory governments are measured at fair value through the profit and loss and reduced to the extent to which they are impaired or uncollectable.

(e) Administered investments in Commonwealth Government Securities

The face value of Australian Government issued securities held as an investment in the Treasurer’s name through the investment power under the Financial Management and Accountability Act 1997 is deducted from the face value of the administered borrowings liability. Any gain or loss on acquiring investments, calculated on a first-in-first-out basis is reported in the Schedule of Revenues and Expenses Administered on Behalf of Government and recognised at the time the investment is made.

The net effect of this accounting policy is to report the impact of transactions with external parties only.

Australian Government issued securities held as an investment are available for securities lending (see Note 2.15(h)).

(f) Administered borrowings — Commonwealth Government securities

Where a security is issued at a premium or discount, the premium or discount is recognised at that time and included in the book value of the liability administered on behalf of government. The discount or premium is amortised over the life of the security.

For Treasury Capital Indexed Bonds, the principal value appreciates over time with the rate of inflation. As future inflation rates are not certain, an estimate of the Australian Government’s future redemption cost on maturity is not disclosed in the financial statements.

Borrowings are recognised on a gross basis, that is, they include borrowings on behalf of the State and Territory governments.

From 1 July 2004 to 30 June 2005

Under previous Australian GAAP, Commonwealth Government Securities were measured on an amortised cost basis in accordance with the historic cost convention, using the effective interest rate method (or market yield to maturity at time of issuance).

Adjustments on transition date: 1 July 2005

At the date of transition Commonwealth Government Securities (principal value $57,626.1 million, fair value $62,365.9 million) are measured on a fair value basis. Perpetual bonds (principal value of $11.1 million) and overdue bonds (principal value of $6.9 million) are measured at amortised cost. On 1 July 2005 changes in carrying amounts for Commonwealth Government Securities measured at fair value were taken to opening equity.

From 1 July 2005

Commonwealth Government Securities are measured on the following bases:

Treasury Bonds, Treasury Capital Indexed Bonds, Treasury Notes, fixed rate bonds and zero coupon bonds are measured at fair value through the profit and loss; and
Perpetual bonds and overdue debt are measured at amortised cost.

(g) Derivative transactions

The AOFM executes domestic interest rate swap transactions on behalf of the Australian Government to assist with the management of interest rate risk associated with the debt portfolio.

The AOFM operates a prudent credit risk management framework surrounding its interest rate swap transactions. It transacts with high quality counterparties (currently A2/A long term credit rating or higher) and actively undertakes credit mitigation strategies where credit exposure limits are reached. During 2004-05 the credit risk management framework was strengthened by the incorporation of collateral security arrangements. No collateral transactions were undertaken during 2005-06 (nil for 2004-05).

No specific swap debtors have been assessed as being unable to meet contractual obligations due to the Australian Government as at 30 June 2006. Consequently, the AOFM has not established a provision for uncollectability for amounts due on interest rate swap contracts.

From 1 July 2004 to 30 June 2005

The AOFM has taken the exemption available under AASB 1 to apply AASB 132 and AASB 139 from 1 July 2005. The AOFM has applied previous Australian GAAP in the comparative information on derivatives.

Under previous Australian GAAP interest rate swaps were measured on an amortised cost basis in accordance with the historic cost convention. The notional principal associated with interest rate swaps was not recognised as an asset or liability. Swap interest payable and receivable was recognised on a proportional basis from the date of the last coupon payment to the date of the next coupon payment. For fixed rate legs the interest receivable or payable was referenced to the contracted interest rate. For floating rate legs the interest receivable or payable was referenced to the relevant reset interest rate.

Adjustments on transition date: 1 July 2005

At the date of transition interest rate swaps (net principal value $nil, net fair value $676.6 million) are measured on a fair value basis. On 1 July 2005 changes in carrying amounts for interest rate swaps were taken to opening equity.

From 1 July 2005

Interest rate swaps are measured at fair value through the profit or loss.

The AOFM does not apply hedge accounting.

(h) Securities lending facility

During 2004-05 the AOFM established a securities lending facility for Treasury Bonds. The facility is operated by the RBA and is governed by the terms and conditions of an agency agreement between the RBA and the AOFM. The purpose of the facility is to enhance the efficiency of the bond market by allowing bond market participants to borrow Treasury Bonds (generally for a period of no more than several days) when they are not readily available from other sources in the market.

The securities lending facility operates by entering into two instantaneous repurchase agreements with the party wishing to borrow securities — a repurchase agreement (the sale of Treasury Bonds to the party and agreement to buy them back at a future time at an agreed price) and a reverse-repurchase agreement (the purchase of Commonwealth Government Securities from the party and agreement to sell them back at a future time at an agreed price). The exchange is market value matched subject to a 2 per cent initial margin imposed by the government for credit risk mitigation purposes. There is provision for making margin calls after initial exchange where the Commonwealth Government Securities pledged as collateral by the other party fall in value relative to the Treasury Bonds loaned under the facility. The repurchase and reverse-repurchase agreements are at-call, that is they do not have set terms.

Interest is payable under the facility. The interest rate payable by the other party is the target inter-bank lending rate. The interest rate payable by the Australian Government is the target inter-bank lending rate less 300 basis points. Net interest earnings of the Australian Government are reported as revenue when received. The temporary purchase and sale of Commonwealth Government Securities under the facility is recorded off-balance sheet. See Note 25 for details of transactions undertaken during the financial year under the facility.

(i) Foreign currency

Transactions denominated in a foreign currency are converted at the exchange rate at the date of the transaction. Foreign currency receivables and payables are translated at the exchange rates current as at the end of the financial year. Net foreign exchange gains and losses (both realised and unrealised) arising from foreign currency transactions are reported separately in the Schedule of Revenues and Expenses Administered on Behalf of Government.

(j) Financial instruments

Accounting policies for financial instruments are stated at Note 24.

(k) Fair value estimation

Where a financial instrument is traded in an active market, fair value is based on quoted market rates. Where market inputs are unavailable, because a financial asset or financial liability is not traded in an active market, subjective judgements and valuation techniques may be used, including quotes for similar instruments and discounted cash flow analysis. In some cases, this may raise practical concerns about the reliability of the exchange price estimate.

The housing advances to the State and Territory governments represent financial assistance for the purpose of housing made by the Australian Government under various annual housing agreement acts, whereby advances were made on concessional terms and to be repaid over 53 year terms. The loans are of a credit foncier nature with progressive maturities to 30 June 2042. These transactions are not traded and, especially for those with the longest terms to maturity, a direct market benchmark to underpin fair value measurement does not exist. However, the AOFM considers that acceptable estimates can be obtained from data on Commonwealth Government Securities. This represents a change from the initial view indicated in the 2004-05 financial statements. The AOFM has applied a discounted cash flow methodology for valuing the housing advances based on market yields for its most liquid Treasury Bonds on issue. The longest dated Treasury Bond as at 30 June 2006 was the March 2019 series (February 2017 series as at 30 June 2005). Cash flows beyond the longest dated Treasury Bond series were discounted at these rates.

1.16 New accounting standards applicable from 2006-07

AASB 139 Financial Instruments: Recognition and Measurement (issued in July 2004) included a free choice option to designate financial instruments at fair value through the profit or loss.

This option was restricted under AASB 2005-4 Amendments to Australian Accounting Standards [AASB 139, AASB 132, AASB 1, AASB 1023 and AASB 1038], issued in June 2005 and applicable to reporting periods commencing on or after 1 January 2006 (1 July 2006 for the AOFM). Subject to materiality, designation of fair value through the profit or loss on initial recognition of a financial instrument is only available where a financial instrument contains an embedded derivative, or when doing so results in more relevant information to users of general purpose financial reports because either:

it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or
a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.

Derivatives and assets held for trading continue to be required to be measured at fair value through the profit or loss.

The AOFM is currently assessing the impact on its accounting policy on commencement of AASB 2005-4 on 1 July 2006. The amendment may impact on the measurement of housing advances to the States and Northern Territory. Housing advances are currently measured at fair value through profit or loss.

Note 3: The impact of transition to Australian Equivalents to IFRS (AEIFRS) from previous Australian GAAP

AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards requires an entity to explain how the transition from previous Australian GAAP to AEIFRS effects its financial statements. AASB 1 also requires an entity that has elected to present comparative information that does not comply with AASB 132 and AASB 139 to disclose the effect of adjustments on the transition date (1 July 2005).

Departmental financial statements

There is no financial impact on the AOFM’s departmental financial statements arising from the transition to AEIFRS.

Administered financial statements

The following table summarises the impact of the transition to AEIFRS on AOFM’s administered financial statements:

Effect of transition to AEIFRS:	As at 30 June 2005	Period ended 30 June 2005	From1 July 2005
Administered Assets and Liabilities	Apply previous Australian GAAP	N/A	AEIFRS compliant. Apply fair value through the profit or loss to certain financial assets and financial liabilities.
Administered Revenues and Expenses	N/A	Apply previous Australian GAAP	AEIFRS compliant. Changes in fair value due to impact of changes in interest rates are reflected through the profit or loss.
Administered Schedule of Cash Flows	N/A	AEIFRS compliant	AEIFRS compliant.

N/A – not applicable.

The AOFM has taken the exemption available under AASB 1 to apply AASB 132 and AASB 139 from 1 July 2005. The AOFM has applied previous Australian GAAP in the comparative information on financial assets and financial liabilities. Apart from AASB 132 and AASB 139 the move to AEIFRS has had no additional impact on the AOFM’s administered financial statements.

Under previous Australian GAAP the AOFM measured financial assets and financial liabilities on an amortised cost basis in accordance with the historic cost convention. From 1 July 2005, the AOFM has applied the fair value option available in AASB 139 Financial Instruments: Recognition and Measurement to measure all administered financial assets and financial liabilities, which are reliably measurable at fair value, at their fair value. The impact on the AOFM’s administered financial assets due to adoption of a fair value methodology is $375 million (favourable) as at 1 July 2005. The impact on the AOFM’s administered financial liabilities due to adoption of a fair value methodology is $3,192 million (unfavourable) as at 1 July 2005. The adjustments have been recognised as an adjustment to opening equity.

Adjustments on transition to AASB 139 Financial Instruments: Recognition and Measurement on 1 July 2005

Note 4: Operating revenues

Note 5: Operating expenses

Amounts relate to minimum lease payments only. Novated lease payments from salary packaging of motor vehicles are disclosed in ‘other employee expenses’.
Depreciation or amortisation was not allocated to the carrying amounts of other assets.

Note 6: Financial assets

Appropriations receivable-undrawn are appropriations controlled by the AOFM but held in the Official Public Account under the government’s ‘just-in-time’ drawdown arrangements. As at 30 June 2006, the balance comprises undrawn equity injections of $1,473,220 ($1,473,220 as at 30 June 2005) and undrawn appropriations of $7,783,898 ($6,317,958 as at 30 June 2005).

Note 7: Non-financial assets

All revaluations are independent and are conducted in accordance with the revaluation policy stated at Note 2. In 2005-06, the revaluations were conducted by an independent valuer, the Australian Valuation Office. As at 1 April 2006, a revaluation decrement was made of $170,252 for leasehold improvements. This comprised a $138,041 offset to the Asset Revaluation Reserve and an expense of $32,211. In addition a revaluation decrement of $36,027 was charged as an expense for computers, plant and equipment as at 1 April 2006.

The AOFM does not hold any finance leases.

Note 7: Non-financial assets (continued)

Note 8: Payables

Note 9: Provisions

The 2005 balance includes a one-off employer superannuation contribution of $92,884 payable to the Department of Finance and Administration.
The 2005 current/non-current split for the employee entitlement provision was reclassified to be compliant with AEIFRS. Under AEIFRS, liabilities are to be classified as current where there is a legal right to payment within twelve months, even where payment is not expected.
In accordance with the terms of its lease agreement for office accommodation, the AOFM is required to restore the leased premises to its original condition at the conclusion of the lease. The AOFM has made a provision to reflect the estimated present value of this obligation.

Note 10: Cash flow reconciliation

Note 11: Contingent liabilities and assets

Unquantifiable contingencies

The AOFM is not aware of any unquantifiable contingencies as of the signing date that require disclosure in the financial statements.

Remote contingencies

The AOFM has indemnified a number of contractors providing goods and services under contract for losses incurred by the contractor due to, amongst other things, AOFM’s failure to observe certain terms of contract, or wrongful, unlawful or negligent acts. The AOFM is not aware of any event that has occurred that may trigger action under the indemnities.

Note 12: Executive remuneration

The number of executives who received or were due to receive total remuneration of $130,000 or more:

	2006	2005
$265,000 to $279,999	1	-
$280,000 to $294,999	-	1
$295,000 to $309,999	1	-
$370,000 to $384,999	-	1


The aggregate amount of total remuneration of executives shown above	$584,338	$660,194
The aggregate amount of separation and redundancy payments during the year to executives shown above	-	-

Remuneration means any money, consideration or benefit including wages, salaries, performance pay, accrued leave entitlements (excluding superannuation on-costs), superannuation contributions, the cost of motor vehicles, housing, commuting, fringe benefits tax and allowances. Remuneration does not include reimbursement of out-of-pocket expenses incurred for work related purposes. Where the AOFM is not entitled to an input tax credit, remuneration includes the non-recoverable GST amount.

In 2004-05 the AOFM was subject to a one-off employer superannuation contribution (of $92,950) for one of its executives payable to the Department of Finance and Administration. The contribution has been included in the 2005 remuneration figures disclosed above.

Note 13: Remuneration of auditors

Financial statement audit services are provided free of charge to the AOFM. The fair value of the audit services provided by the Australian National Audit Office was:

	2006 $	2005 $
	247,500	247,500

Auditors’ remuneration is disclosed inclusive of GST.

Included in the 2005 figure above, is an amount of $13,200 relating to the 2005-06 financial statements audit, arising from work done on the opening balance sheet to be prepared under Australian Equivalents to International Financial Reporting Standards.

No other services were provided by the Auditor-General.

Note 14: Average staffing level

The average staffing level for the AOFM during the year was:

	2006	2005
	35(a)	33(a)

Paid ASL only.

Note 15: Specific payment disclosures

Departmental

No ‘Act of Grace’ payments were made during the reporting period (nil for 2004-05).

No waivers of amounts owing to the government were made pursuant to subsection 34(1) of the Financial Management and Accountability Act 1997 during the reporting period (nil for 2004-05).

No payments were made under the ‘Defective Administration Scheme’ during the reporting period
(nil for 2004-05).

No payments were made under section 73 of the Public Service Act 1999 during the reporting period
(nil for 2004-05).No payments were made under ex-gratia programs during the reporting period (nil for 2004-05).

Administered

No ‘Act of Grace’ payments were made during the reporting period (nil for 2004-05).

Four waivers of amounts owing to the government were made pursuant to subsection 34(1) of the Financial Management and Accountability Act 1997 during the reporting period totalling $186 ($199 for 2004-05).

No payments were made under the ‘Defective Administration Scheme’ during the reporting period
(nil for 2004-05).

Note 16: Departmental financial instrumentsNote 16A: Terms, conditions and accounting policies

Financial instruments	Notes	Accounting policies and methods	Nature of underlying instruments
Financial assets		Financial assets are recognised when control over future economic benefits is established and the amount of the benefit can be reliably measured.
Cash at bank		Deposits are recognised at their principal amounts.	The AOFM maintains an operational bank account with the Reserve Bank of Australia. Monies in the account are swept into the Official Public Account nightly. Interest is not earned on the AOFM’s account.
Receivables	6A	Receivables are recognised at their principal amounts due less any provision for bad and doubtful debts. Collectability of debts is reviewed at balance date. Provisions are made when collection of the debt is judged to be less rather than more likely.	Receivables primarily comprise amounts due from the Official Public Account for undrawn departmental appropriations and for the reimbursement of staff costs associated with overseas deployments. Receivables are non-interest bearing.
Financial liabilities		Financial liabilities are recognised when a present obligation to another party is entered into and the amount of the liability can be reliably measured.
Payables and provisions	8, 9	Creditors and accruals are recognised at the amounts at which the liabilities will be settled. Liabilities are recognised to the extent that goods or services have been received (and irrespective of having been invoiced).	Trade liabilities are normally settled on 30 day terms.

Note 16: Departmental financial instruments (continued)

Note 16B: Interest rate risk

The AOFM’s exposure to interest rate risk and the effective weighted average interest rate for each class of financial assets and financial liabilities is set out below:

Note 16: Departmental financial instruments (continued)

Note 16C: Net fair values of financial assets and liabilities

Financial assets

The net fair values of cash and non-interest bearing monetary financial assets approximate their carrying amounts.

Financial liabilities

The net fair values for provisions and payables approximate their carrying amounts.

Note 16D: Credit risk exposures

The AOFM’s maximum exposures to credit risk at reporting date in relation to each class of recognised financial assets is the carrying amount of those assets as indicated in the Balance Sheet.

Note 17: Revenue before re-measurements administered on behalf of government

Note 18: Expenses before re-measurements administered on behalf of government

Note 19: Administered re-measurements

Net market valuation gains / (losses) represents the unrealised fair value gains or losses on the portfolio of administered financial assets and financial liabilities. These valuation gains or losses reflect changes in financial exposures on financial assets and financial liabilities measured at fair value through the profit or loss, due to changes in interest rates and the passage of time. In a passive ’issue and hold to maturity’ strategy, such as that relating to the AOFM’s debt issuance and management activities, the revaluation effect will net to zero over the life of a financial instrument.

Note 20: Assets administered on behalf of government^(a)

Note 20: Assets administered on behalf of government(a)

Where the AOFM applies fair value accounting to a financial asset, the aggregate value of the financial asset is recorded against a single financial statement class. Where the historic cost convention is applied, the value of a financial asset is disaggregated and recorded against several financial statement classes (for example: the principal value of a financial asset is recorded separately to coupons receivable on the asset).
The maturity profile for 2006 is based on contractual re-pricing dates. For 2005 the maturity profile was based on principal repayment dates.

Note 21: Liabilities administered on behalf of government^(a)

Note 21: Liabilities administered on behalf of government(a)

Where the AOFM applies fair value accounting to a financial liability the aggregate value of the financial liability is recorded against a single financial statement class. Where the historic cost convention is applied, the value of a financial liability is disaggregated and recorded against several financial statement classes (for example: the principal value of a financial liability is recorded separately to coupons payable on the liability).
The August 2005 series of Treasury (Capital) Indexed Bonds matured on 20 August 2005. The capital accretion on this series was $631 million.

Note 22: Administered reconciliation table

Note 23: Administered contingent liabilities and assets

Unquantifiable contingencies

The AOFM is not aware of any unquantifiable contingencies as of the signing date that require disclosure in the financial statements.

Remote contingencies

(i) The government has indemnified the underwriters of foreign currency denominated loans issued by the Australian Government outside Australia against any loss, liability, costs, claims, charges, expenses, actions, or demands due to any misrepresentation by the Australian Government and any breach of warranties. The AOFM is not aware of any event that has occurred that may trigger action under the indemnities.

(ii) In the extremely unlikely event of default by a borrower of Treasury Bonds under the securities lending facility, the AOFM would be in a position to sell the securities pledged by the borrower to offset the increased liability to the government.

Note 24: Administered financial instruments

Note 24A: Terms, conditions and accounting policies

Financial instruments	Notes	Accounting policies and methods	Nature of underlying instruments
Financial Assets		Financial assets are recognised when control over future economic benefits is established and the amount of the benefit can be reliably measured.
Cash at bank	20A	Deposits are recognised at their principal amounts.	The AOFM maintains two operational bank accounts with the Reserve Bank of Australia. Interest is not paid on these accounts.
Loans to State and Territory governments	20B	From 1 July 2004 to 30 June 2005	Until July 1990, the Australian Government borrowed on behalf of the State and Territory governments and allocated a portion of the proceeds of its Treasury Bond raisings to those governments. In addition to Treasury Bond allocations, there are outstanding balances of loans raised by the States prior to 1 January 1924. The States and Territories are responsible for meeting all obligations as to interest and principal on the debt on allocation to them in accordance with the provisions of the Financial Agreement Act 1994. State and Territory government loans also include advances, not evidenced by the issue of securities, made for housing and specific purpose capital payments.
		Loans are recognised at historic cost. Interest is credited to revenue as it accrues. Collectability of amounts outstanding is reviewed at balance date. Provision is made for bad and doubtful loans where collection of the loan or part thereof is judged to be less rather than more likely.
		From 1 July 2005
		Treasury Bond allocations and housing advances to the States and Territories are measured at fair value. Other loans are measured at amortised cost.
Interest rate swaps	20B	From 1 July 2004 to 30 June 2005	The AOFM manages the cost and risk inherent in debt on issue, by executing domestic interest rate swaps to adjust the blend of fixed rate and variable rate debt in the portfolio and the extent to which it is subject to immediate re-pricing.
		Interest rate swaps are recognised at historic cost.
		From 1 July 2005
		Interest rate swaps are recognised at fair value.
Investments	20C	From 1 July 2004 to 30 June 2005	Under section 39(2) of the Financial Management and Accountability Act 1997, the AOFM invests public money in authorised term deposit investments for the purpose of managing the Australian Government’s debt.
		Investments are recognised at their principal amounts. Interest is credited to revenue as it accrues.
		From 1 July 2005
		Investments are recognised at fair value.
Accrued revenues	20D	From 1 July 2004 to 30 June 2005	For 2005, accrued revenues comprises interest receivable on swaps, term deposits and loans to State and Territory governments.For 2006, accrued revenues comprises interest receivable on loans to State and Territory governments measured at amortised cost.
		Interest on financial assets is credited to revenue as it accrues and not when it is received. Revenue earned but not yet received is recognised as an asset called ‘accrued revenues’.
		From 1 July 2005
		Accrued revenues on financial instruments are disclosed separately for assets measured at amortised cost only.

Note 24: Administered financial instruments (continued)

Note 24A: Terms, conditions and accounting policies (continued)

Financial instruments	Notes	Accounting policies and methods	Nature of underlying instruments
Financial Liabilities		Financial liabilities are recognised when a present obligation to another party is entered into and the amount of the liability can be reliably measured.
Commonwealth Government Securities	21A	From 1 July 2004 to 30 June 2005Commonwealth Government Securities are recognised at their face value plus or minus unamortised issuance premiums and discounts. Premiums and discounts in relation to such borrowings are amortised over the life of the borrowing.From 1 July 2005Commonwealth Government Securities are recognised at fair value.	In managing all operational aspects of debt management on behalf of the Australian Government, the AOFM issues and administers various borrowing instruments including Treasury Bonds, Treasury Indexed Bonds and Treasury Notes. The AOFM also administers the redemption of Commonwealth Government Securities and other debt on allocation to the States and Territories.
Interest coupons payable on debt	21B	From 1 July 2004 to 30 June 2005Interest payable at the end of the financial year on coupons is recognised on a proportional basis from the date of last coupon payment to the date of the next coupon payment.From 1 July 2005Interest coupons on financial instruments are disclosed separately for liabilities measured at amortised cost only.	Interest coupons are payable on Commonwealth Government Securities and other loans.
Capital accretion on Treasury (capital) indexed bonds	21B	From 1 July 2004 to 30 June 2005The principal value of Treasury (capital) indexed bonds appreciates over time with the rate of inflation. Capital accretion is recognised as it accumulates. From 1 July 2005Not applicable. Capital accretion is not disclosed separately.	For 2005 only, Treasury (capital) indexed bonds.

Note 24: Administered financial instruments (continued)

Note 24B: Derivatives

Pay-fixed swaps are primarily used to manage the proportion of the debt portfolio subject to immediate re-pricing.
Receive-fixed swaps are primarily used to manage the blend of fixed and variable rate debt in the portfolio.

Note 24: Administered financial instruments (continued)

Note 24C: Foreign exchange risk

Since February 2004, the AOFM has been exposed to foreign exchange risk due to contractual obligations on foreign currency loans and securities only.

During 2004-05 the AOFM repurchased and cancelled sterling denominated debt of £39 million (face value).

The following currency exposures existed for principal values as at 30 June:

Note 24: Administered financial instruments (continued)

Note 24D: Interest rate risk

The AOFM’s exposure to interest rate risk and corresponding weighted average effective interest rates for each class of financial asset and financial liability is set out below. The maturity profile is based on contractual re-pricing dates.

Amounts are represented on a gross basis. This differs from the presentation in the Schedule of Assets and Liabilities Administered on Behalf of Government, where amounts are on a net basis.
Interest rates are nominal interest rates with exception to Treasury (capital) indexed bonds (which are real interest rates).

Note 24: Administered financial instruments (continued)

Note 24D: Interest rate risk (continued)

Amounts exclude swaps.
Amounts are represented on a gross basis. This differs from the presentation in the Schedule of Assets and Liabilities Administered on Behalf of Government, where amounts are on a net basis.
Interest rates are nominal interest rates with exception to Treasury (capital) indexed bonds (which are real interest rates).

Note 24: Administered financial instruments (continued)

Note 24E: Net fair values of administered financial assets and liabilities

Comprises face value of financial instruments, with exception to Treasury (capital) indexed bonds where the inflation adjusted capital value at the end of the financial year is included in the figures for Commonwealth Government Securities.
Under previous AGAAP the net fair value of housing advances was assessed to be the carrying amount in accordance with the historic cost convention. With the introduction of AEIFRS, the net fair value as at 30 June 2005 has been recalculated based on a discounted cash flow methodology using Treasury bond yields.

Note 24: Administered financial instruments (continued)

Note 24E: Net fair values of administered financial assets and liabilities (continued)

Financial assets

The net fair values of cash, non-interest bearing monetary financial assets and short-term investments, approximate their carrying amounts. The net fair value of swaps is based on discounted cash flows using a zero coupon curve valuation methodology created from observable market rates as at the end of the financial year. Loans to State and Territory governments not evidenced by the issuance of securities are valued on a discounted cash flow basis using a zero coupon curve methodology created from the most liquid components of the domestic debt portfolio.

Financial liabilities

The net fair values of Commonwealth Government Securities are based on discounted cash flows using a zero coupon curve valuation methodology created from observable market rates. The zero coupon curve is based on market yields of the most liquid components of the domestic debt portfolio. As the secondary market for the Australian Government’s foreign currency denominated debt is largely illiquid, the valuation approach is based upon deposit and swap rates in each relevant foreign currency.

Note 24F: Credit risk exposures

There is no credit risk on the notional principal associated with interest rate swaps. Credit risk on interest rate swaps relates to the net fair value of net interest obligations owing by each counterparty to the Australian Government.

The AOFM’s exposure to credit risk under the securities lending facility is zero.

The maximum credit risk exposure for each class of financial asset, based on market value at the end of the year is disclosed below by credit rating concentration.

Where a counterparty has a split rating, the AOFM’s exposure to the counterparty is allocated to the lower credit rating.

Note 24F: Credit risk exposures (continued)

Where a counterparty has a split rating, the AOFM’s exposure to the counterparty is allocated to the lower credit rating.
Under previous AGAAP the maximum credit exposure on housing advances was assessed to be the carrying amount in accordance with the historic cost convention. With the introduction of AEIFRS, the credit exposure as at 30 June 2005 has been recalculated based on the estimated fair value of the housing advances.

Note 25: Securities lending facility

Details of Treasury Bonds loaned to bond market participants under the securities lending facility are as follows:

Note 25: Securities lending facility - 2006

Note 25: Securities lending facility - 2005

Note 26: Disclosures of appropriations

Note 26A: Acquittal of authority to draw cash from the Consolidated Revenue Fund (Appropriations) for Ordinary Annual Services Appropriations

Outcome 1 — Enhance the Commonwealth’s capacity to manage its net debt portfolio

FMA = Financial Management and Accountability Act 1997.

(a) The undrawn, unlapsed administered appropriation is to be formally lapsed by the Minister for Finance and Administration in 2006-07.